Given the recent weakness in cloud stocks, the group needed a strong showing from Adobe. My contention is the company's latest results weren't great, but not the disaster the group has shown as of late, and nothing close to FedEx.
That being said, there are two disappointing items stemming from the Adobe results outside of guidance.
First, the digital media (aka Photoshop) growth of 22% year over year was the slowest growth the company's segment has experienced in over two-and-a-half years. Some could argue growing a $1.96 billion quarterly revenue figure by 22% year over year is anything but disappointing, but when Adobe is flashing a current P/E of 51, it can become an issue to see growth slowing. Furthermore, ARR (Annualized Recurring Revenue) in the digital media segment is growing at 5% quarter over quarter, so it is not trending in a way that we should expect the 22% year-over-year number to increase moving forward.
The second issue is growth from recent acquisition Marketo did not meet expectations. Adobe spent $4.75 billion for the B2B market apps addition to its creative tool. For about double that price -- OK, maybe a little more --Adobe could have swept up DocuSign (DOCU) instead. It's a marriage I may not want to see, because I like DocuSign, but it is one that makes sense, especially for Adobe.
There's likely been an opportunity to get DocuSign in the $10 billion to $12 billion area, although with the stock's recent rally and strong earnings report that number is now in the $14 billion to $15 billion range. With DocuSign's 40% revenue growth and 47% billings growth plus a natural fit into Adobe's PDF and own signature platform, I don't think we'd be talking about disappointment this quarter for Adobe.
Adobe management guided EPS numbers to $2.25 for the fourth quarter, which will put it a nickel below expectations. After an $0.08 beat this quarter, I would posit some stronger margin revenue was pulled forward into the third quarter.
The weekly chart on Adobe doesn't become troublesome until the stock breaks below $260. Then, we have the possibility of a bearish head-and-shoulders pattern that targets the December 2018 lows.
Buyers bounced Adobe off of support Wednesday morning, so I would expect a test of $282. Should we see a weekly close above $285, then I think traders need to consider an upside trade. Until that time, we are in a tight, bearish channel here with this week's low as support and this week's high as resistance. Anything in between is small pin action.
I'd wait for a price trigger before making a move.